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BUSINESS DEVELOPMENT: RAISING INITIAL CAPITAL FOR GROWTH
THE NUTURING PERIOD
It was 1982 and the Tax Reform Act of 1986 was still four years away which meant that tax shelters were the rage with both institutional and individual investors. The Tax Reform Act took away all the attractiveness of tax shelters as investment vehicles, as you may recall.
Operating capital from the funds came in the form of the G&A fees payable to GWDC. These fees paid for two things: The operations for the business and also the operations of the Daniel S. Pena, Sr. Household.
This was the nurturing period for GWDC. Every new business goes through this period. In this period, the business enterprise is in its most fragile condition. Jar or the slightest bump will break it into a thousand little pieces. It has to be handled it has to be coddled; it has to be nurtured as if it were a newborn child.
I nurtured GWDC with a velvet- covered iron fist. The velvet was for GWDC, the iron fist for me. I knew that selling a series of look, and I knew that GWDC needed nourishment to grow -a like tax shelters wouldn’t provide that needed nourishment.
I knew that the second tax shelter had to be grander than the first, the third grander compared to the second. I knew it was time to put myself under the threat of the iron fist.
It was time. Great Western was either going to live or die, but it was time to find out.
I knew that the road to the big time in tax shelters went through Wall Street, but I also knew that you couldnât get there from a small office in Southern California with a no-name product base. I went to work and put together a series of illusions which put me with the third tax shelter on Wall Street.
It was a classic example of the perception/reality ruse, also it worked. It was the first time that I had really done this trick with my own money at stake, and I was surprised at how easy it was to pull off. As a matter of fact, my successes with GWDCâs second and third tax shelters lead directly to my decision to acquire what would eventually be Guthrie Castle.
As I mentioned previously, although the drilling fund tax shelters were successful financially, there was one aspect of this period in GWDCâs nurturing period that really bothered me. The revenue steam from GWDCâs operations needed to fund both the business and my household. I was playing with my own money.
The business decisions I had to make contained a variable that didnât belong. There clearly was a problem that needed to be taken good care of.
PeÃ±a-ism. You cannot win at poker with scared money â it gives off a stench that is repugnant to the winning hand.
Most entrepreneurs find themselves in this same situation. On the front end of the business development cycle, it’s their money that’s funding operations. It’s money that is scared, and scared money is very difficult to play tough and hard with.
Remember, this is the nurturing period for the business. Everything is in the technical aspects its infancy, the organization, the human resources, and the financing.
The entrepreneurâs attention is needed everywhere. There is a new problem occurring every minute. Stress is at its maximum pressure. Itâs time to get some relief; itâs time to get some OPM.
Funds are needed by a business enterprise for facilities capital and for working capital. Working capital pays for on-going product development, business development, and operations. Facilities capital pays for the facilities, machinery and equipment necessary to conduct the mission of the business.
Equity can be in the form of preferred or common shares to stock, or any hybrids and variations of the two.
Financing the facilities and working capital requirements of a new business enterprise with funds from retained earnings isn’t a viable alternative. To begin with, there probably isnât going to be an earned surplus, but rather an accumulated deficit. Secondly, even if there exists an earned surplus, it probably wonât amount to enough to provide a serious source of funds for growth.
That leaves debt or equity as the remaining sources of funds for the new business. With debt, you retain ownership but incur interest expense, a fixed charge of the business which can eat up a lot of net margin dollars, thereby restricting managementâs ability to use the funds from operations for its own projects.
With equity, there’s no drain on the funds from operations but there’s a dilution of control and ownership. A detailed discussion of the pros and cons of using debt or equity is beyond the scope of the seminar program. Each situation is different.
If you’re interested, let me recommend to you which you seek independent guidance from professionals in this area. Unfortunately, the majority of the guidance you are going to receive comes from people who ran their own business or never started.
In August, 1984 I chose to raise capital for Great Western Development Corporation through the use of a public offering for equity shares in a new corporate entity called Great Western Resources Inc. Another option available was a private placement of equity shares.
Once again, for those readers interested in the pros and cons of public vs. Private offerings, I ‘d direct you to the same âappropriate professionalsâ in this area.
My 39th birthday,, on August 10, 1984 GWRI had its initial public offering on the London Stock Exchange. Of 25, 000, 000,000 common shares authorized, 20,000 were issued on this day, 5,000,000 to be traded by the public on The Exchange. The stock was issued at 160p (about $2.00). At the end of the day, our stockbrokers presented me with a check for $10,000,000 representing the publicâs 25% share of the IPO.
The remainder of this seminar manual covers topics on business growth and development as I encountered them at GWRI from 1984 to 1992.
THE INITIAL PUBLIC OFFERING BACKGROUND FOR THE DECISION
By the time I ‘d accomplished a lot with Great Western Development Corporation. The conventional wisdom had tried to dictate to me on a number of key issues and had come on all of them.
My YCDT philosophy was now a permanent part of me.
The conventional wisdom had declared:
As an entrepreneur I was convinced of a number of things concerning GWDC as an emerging company and about myself in early 1984. I was convinced that GWDC was in the best business sector (oil & gas) at the right time ( pre Tax Reform Act of 1986 and with the Republicans in the form of Ronald Reagan in the White House).
And I was convinced that I had the right stuff (the YCDT philosophy in the form of The Five Credos) to recognize and take advantage of the right opportunities.
But I knew that philosophy and theory were one thing, but implementation, execution, and performance another. I took inventory of the things I ‘d, to see whether they were enough into an accelerated growth period and to take GWDC out of its nurturing period.
Â· First, and most important by a mile, I had a dream. That dream was to build the largest natural and eventually the fastest growing
resources company in the world.
Â· I had the human resources. I ‘d two partners who believed in it and shared my dream. They were also very good technicians in their fields of expertise.
Additionally, I had hired arguably the best administrative assistant in the world. She’s still with me today.
Â· I ‘d seen the perception/reality ruse work with all the purchase of Guthrie Castle and with the second and third tax shelter.
Â· I had established my credibility with the American banking system. I ‘d financial support.
Remember that federal government fuel supply contract that grew in value to $50 million? Well, that money found its way into the banking system and became what bankers call âfloatâ.
Bankers like float because I gave it to them and they liked me.
Â· Last, but by no means least, my partners and I ‘d tasted success. We knew how it felt and we liked it. It whetted our appetites for more.
And I became even more obsessed with it!
UK vs. THE U.S. (THE PROVERBIAL KNOCK)
All GWRâs income-producing assets are in the United States. They’ve been in the United States.
A number of the major reasons are listed below. Today they were valid back in 1984, and are still valid. Iâm not recommending that each and every entrepreneur run to the London Stock Exchange as the only source of ready capital. But I am suggesting that there are numerous opportunities beyond our home soil.
1. The fees available for merchant bankers, investment bankers, stock brokers, lawyers and accountants were way too low to get U.S.
firms interested. However, we were big enough for the UK firms to take notice.
2. We were too small for the U.S., fees aside. It would have taken a monstrous effort just to get somebody even to the point of remote interest.
3. In 1984, the U.S. oil market was simply wrung out. Besides, the U.S. was going berserk with junk bonds and LBOs where fees generated were in the 10âs of millions of dollars.
4. The UK was new to the oil business. The first oil had been discovered in the North Sea in 1975 and the British were still enthusiastic about exploration.
5. As were would have been by the SEC, we were not subject to the same scrutiny.
THE CHINK IN THE ARMOR
This last point was important, very important, to the quantum leap development schedule I had established for GWR.
It took me eight years to run $820 cash into $400, 000, 000 by 1990 in market capitalization for GWR. My goal was $23 billion by the mid 1990s.
If I ‘d tried to do that in the U.S., it probably would have taken me 20 to 25 years just to get to the first $400 million.
I found the chink in the armour of âThe Cityâ, the international cognomen for the financial district in the City of London. The chink was the ego, arrogance, and insecurity.
It was all part of the tradition, the lore of life in The City. It was as British as kidney pie and cricket. It was in their blood; it was in their training; it was in their entire sense of being. And I found that I really could play them like a Stradavarius.
They were no match; they never had a chance; it was easy.
Whether we actually were smarter or not wasnât important. The issue was we felt and acted a great deal smarter. We acted as if we had no limits to our abilities!
Okay, so where does that leave you, the reader of this manual? âIâm no Dan PeÃ±a,â you say? âI have no desire to take on the financial institutions in London,â you say? You donât need to be or do any of these things to succeed with your dream.
The ones that find it’s going to succeed; those who donât, wonât.
In early 1984 we had purchased for $60,000 an option to buy an equity interest in a series of oil & gas properties with the right to drill up to twenty-four wells. We had some assets from our drilling funds around.
At the close of business on August 10, 1984, Great Western had issued and outstanding 20,000,000 shares of common stock which closed that day on The Exchange at approximately Â£2.00, or $2.50.
The market value of the company was $50,000,000,000,000, or Â£40.
The company had $10,000,000 in the bank and also the cost basis in the stock held by myself and my two partners was $820.00.
How could this happen? Could you generate $50 million in value off of hard assets under $100,000?
Opportunity? To be sure. The prospectus for the IPO included a highly respected petroleum engineerâs report on the commerciality of the oil & gas properties. The engineering report indicated there was a good probability that there was
$50,000,000 of oil reserves.
Salesmanship? To be sure.
Among the things we always did best at Great Western was sell institutions on the value of our stock and the promise of our company.
Perception/reality? You bet.
Works every time. All that happened was I convinced The City I’d build an extremely large energy company. I acted as if I knew I would.
Did I exploit the chink in the armor of The City? With no doubt. But a big energy company was also built by me.
How much of all these types of things is necessary to be successful? Is there?
There’s no recipe. There’s absolutely no requirement to incorporate all these aspects into every floatation. There are other aspects not mentioned here which might be required. There are other aspects that might be present over which you’ll have no control, for example general economic or market conditions.
The aforementioned discussion and methodology is no different when the entrepreneur, you, decide to sell your entire company or assets as part of an exit strategy.
If you donât act (sell) with enthusiasm, you are going to never command top dollars in the selling process.
LIFE FOLLOWING THE IPO
You may want to pinch yourself many times to ensure that youâre not dreaming. It’ll all seem so improbable.
It is by no means the final measure of success or the only measure of success, although an initial floatation is an actual measure of success. It is the most quantifiable.
As it is quantifiable, an entrepreneur should set âgoing publicâ as a goal. Whether it ever comes to fruition or not is of no importance. The idea will help crystallize a lot of your thoughts, vis-Ã -vis operations controls, accounting, marketing, personnel, financing and first and foremost , how your business is valued.
You must have your âstoreâ to be able to go public because you’re taking the publicâs money. It is a good habit to enter.
Acting as if you are a fiduciary is especially helpful when dealing with banks or other financial institutions.
An IPO is a major milestone along the path to making your dream a reality, but itâs also a wake up call. Itâs truly the point of no return on your companyâs journey to its eventual place in the annals of trade and commerce. You canât help but wake up the day after asking yourself, âGee, what do we do now?â
When the public buys stock in your company, they’re buying into something. They’re buying into an opportunity they think will generate a financial return that exceeds or meets their investment criteria. If it didnât meet or exceed their criteria, they would invest their dollars somewhere else.
Financial investment dollars will always seek out the vehicle offering the highest available return on invested capital.
A companyâs opportunity statement(s) are included in the prospectus for the sale of the shares of capital stock.
Their own opportunity is found by each investor in the prospectus.
It might be the attractiveness of the current financial statements.
It may be the believability of the pro formas as the idea of the discounted value of the business enterprise.
It might be the positive assessment of the downside opportunities in the surface of the assumption of the upside risk.
It might be the perceived strength of the companyâs management structure.
It may be the perceived leadership capabilities of the executives. All and any of these things may be quantified for purposes of making an investment decision.
But the prospectus for the sale of share capital is also something else, something very important to the entrepreneur. It is a mission statement. It’s a mandate.
The mandate as well as the mission statement may not be obvious from a reading of the language in the prospectus. This is not to imply that the prospectus is written to hide the true intentions of the company, or that it contains data that is fraudulent or false.
It means that the mission statement and also the mandate might be known to the entrepreneur; that no matter how grand and effusive the disclosure in the prospectus, it is not deliberate or obvious to the casual, reader. It is obvious only to the entrepreneur because it can only be read with the heart and soul.
In the introductory remarks at the beginning of the manual, I talked a lot about the relationship of success and the burning desire to succeed. Eating it. Sleeping it. Concentration. Focus â tight focus â laser beam focus.
Easily. You treat it the same way you would a marriage,
for those of you not married, the way you would a meaningful relationship with another person. You work at it. You work at it hard.
In those times when its continuance is seemingly impossible, you work at it. Never let down; never slack off.
Focus: laser beam focus.
There’s no such thing as too much success; there’s only the next sweeter than its predecessor, more success.
Donât stop, keep going. Only your dream, your dream.
WHICH WAY TO GO
Everyone except me. I had a larger vision.
Hey, Dan PeÃ±a. Whatâs wrong with you anyway? We just went public three months ago. We had a prospectus. We’d figures and facts. They pushed our stock up to $3.50. And now you want to do something different.
You canât do that!
My vision for GWR after the IPO was the same one I ‘d always had. It was a simple one. And it was an elegant one. In fact, I marvelled at its elegant simplicity: I was really going to buy assets in a blending fashion as the means of building the fastest growing and eventually the largest natural company on the planet.
When I brought this to the attention of the board of directors along with the management (I was the Chairman, President and CEO in the post IPO corporate structure), they acted surprised. I saw it as being consistent with the mandate in the prospectus.
I never believed for a second the public and the institutional investors paid what they did for their shares of stock just to see how the twenty-four wells would come out.
If you were conservative, you would have been better off putting your investment dollars in a passbook savings account.
After all, we’d no track record and no earnings in running a public company. In reality, all we had was a vision. Albeit, a very clear vision, but clearest of all to me!
In the event that you are a gambler, you could have done better with the odds in Las Vegas.
AGAINST THE ODDS
And I set out on the road of implementation in performance of that mandate.
Great Western was born in a hail of âYou Canât Do Thatâsâ. In retrospect, that environment served to strengthen its mettle.
I was told more times than I care to remember that GWR couldnât come out at the same time because all of the investment dollars would be scooped up by Jaguar.
I was told to wait. I didnât wait; I knew it had to come off as planned or it would probably never come off. I was correct, as it turned out. We did on our IPO.
Our share price closed at a 25% premium to the IPO offering price, as I mentioned. As well as the headlines of one major U.K. newspaper said, when referring to our IPO the same day as Jaguar, âGreat Western resources, The One That Really Roared.â
Another lucky shot? Perhaps.
One other thing about the advice I was getting. A law firm that was older compared to the United States.
Which they did!
I can remember being told by their most senior partner that if there was ever a conflict of interest between the Great and Queen Western, they’d have to resign. And they hoped I understood!
The conventional wisdom. Popular opinion. The tide of conventionality. These are the entrepreneurs worst enemies. If you desire exponential growth you need to protect yourself against them.